"from henceforth none be so hardy to tell or publish any false News or Tales, whereby discord, or occasion of discord or slander may grow between the King and his People, or the Great Men of the Realm."

From comments here it seems like the meaning of current account imbalances is a big problem for people thinking about the crisis. I just got the new book edited by Leo Panitch and Martijn Konings, American Empire and the Political Economy of Global Finance, in which this gets some discussion. I thought I’d post the entire section of the chapter by Panitch and Gindin where they set out their point of view, because I don’t think they’ve elaborated it as much elsewhere. There’s a later chapter by Scott Aquanno entirely devoted to the role of US Treasury securities in global bond markets which is also extremely relevant; haven’t read it yet but from a skim it looks very good – will post something shortly. I’d be interested to know what people think of this, what needs clarification, etc.

Yet balance of payments deficits did not have the same meaning for the United States as they did for any other state [under Bretton Woods]. This was not widely recognised at the time, but as an obscure paper prepared for the Federal Reserve of Boston pointed out: ‘[t]his asymmetry appears to be appropriate for it corresponds to an asymmetry in the real world’ (quoted in Hudson 2003: 327, italics added). [FOOTNOTE: Kindleberger (1981: 43) was one of the few economists in the 1960s who questioned the significance of the balance of payments crisis in the US, arguing that the deficit largely reflected the American supply of financial intermediary services through borrowing short-term capital and lending long in terms of foreign investment – a ‘trade in liquidity profitable to both sides’ – rather than a trade deficit or over-investment abroad as was commonly understood.] Before this perspective could be universally accepted (especially amongst bankers), however, the fiction of a gold standard behind the dollar standard would have to be abandoned and replaced not only by flexible exchange rates but types of global financial markets that could sustain them. And it would come to be seen that, far from necessarily representing a diminution of American power, the outflow of capital and the balance of payments deficits were actually laying the basis for a dollar-based credit expansion and financial innovation, both domestically and internationally – what Seabrooke appropriately calls the ‘diffusion of power through the dollar’ (2001: 68). Above all, it would be necessary for the American state, as the imperial state, to retain the confidence of the ever more dynamic and powerful financial capitalists in the face of pressures on the dollar. All this implied addressing the deeper contradictions of the Bretton Woods arrangements for fixed exchange rates and tying the dollar to gold, which by then had become a barrier to the American state’s capacity to navigate between its domestic and imperial responsibilities. [pp. 26-27]

… [fast-forward to the 2000s]…

The widespread predictions that the ballooning US trade deficit portended a much more serious crisis waiting to happen were based on the expectation that this deficit was likely to prove unmanageable because it was bound to undermine the dollar as the imperial currency. But it is also necessary to put this in historical perspective. When the balance of payments deficit first emerged in the early 1960s, it led to what now is generally seen as an excessive panic. Robert Roosa, speaking from his experience of trying to address the problem within the Treasury, concluded prophetically in 1970: ‘Perhaps, by conventional standards, the United States would have to become a habitual renegade… barely able to keep its trade accounts in balance, with a modest surplus on the current account, with an entrepot role for vast flows of capital both in and out, with a more or less regular increase in short-term dollar liabilities used for transaction purposes around the world’ (quoted in Hudson 2003: 319).

In the 1970s it was widely assumed that the American trade deficit would necessarily lead to American protectionism. There has certainly been plenty of nationalist sentiment in the US, but rather than withdrawing from world markets the American state has consistently used the threat of protectionism to beat down foreign opposition to the global neoliberal project, thereby transforming ‘nationalist impulses into strategies for opening up other nations’ markets’ (Scherrer 2001: 591). The continuous deficit since the 1980s did not alarm investors. Even while that deficit increased dramatically in the early years of the new century and peaked at almost 6 per cent of GDP by 2006, this did not scare off foreign creditors. To understand this properly it is necessary to reconsider what is often seen as a structural decline in manufacturing competitiveness. While American foreign direct investment continued to expand through the 1990s, manufacturing at home in that decade actually grew faster – much faster – than in any of the other developed countries. Furthermore, the US led the rest of the G7 in the growth of exports right through the 1980s ad 1990s. The US trade deficit was thus not caused by a loss of manufacturing and export capacity but by the enormous importing propensity of a US economy which experienced much greater population growth, and had a much greater proportion of its population working – and working for longer hours – than in any other developed capitalist economy. Imports contributed to lowering the cost of reproducing labour and obtaining both low- and high-tech inputs for business, each of which facilitated low inflation at home as well as increased exports. There were, of course, particular sectors that were hit hrd by the restructuring of American industry, but the overall picture was one of a relatively strong capitalist economy which, while being able to import ever more by virtue of its relative financial strength.

In considering whether the inflow of capital implies that the US economy is vulnerable to capital flight, it is once again important to note that the inflows did not come in just as compensation to ‘cover’ the deficit, as imagined by those focusing exclusively on international trade statistics. The inflow of capital was mainly the product of investors being attracted by the comparative safety, liquidity and high returns that come with participating in American financial markets and the American economy. The dollar stayed at relatively high levels until recently because of that inflow of capital, and it was the high dollar that allowed American consumers and businesses to import the foreign goods cheaply. In recent years the inflow mainly came from central bankers abroad motivated by the goals of padding their foreign exchange reserves and limiting the decline in the value of the dollar relative to their own currencies.

All this precisely reflected how the new imperialism had come to differ from the old one. While financial markets in the old pre-First World War imperialism were quite developed in terms of the size of capital flows, they generally took the form of long-term portfolio investment, much of it only one way, from th imperial centres to the periphery. In contrast, international markes in short-term securities today are massive and, in the absence of the gold standard, it is American Treasury bills that stand as the world’s monetary reserves. In addition, the old imperialism limited the extent of manufacturing in the third world, while the division of labour in the new imperialism has, by way of foreign investment and outsourcing, included the expansion of manufacturing in the third world. This not only contributed to the American trade deficit but as the trade surpluses, espcially in South-East Asia, were recycled into capital flows to the US, it also contributed to making the imperial power itself, remarkably, a debtor in relation to some third world countries. Yet at the same time these very developments sustained the American economy’s ability to have privileged access both the the world’s savings and to cheaper goods.

Even though the recent downward adjustment of the dollar relative to other currencies has reduced the size of the trade deficit, a major speculative run on the dollar is of course not impossible. But the form that the globalisation of capitalism now takes makes this less rather than more likely. The largest holders of the dollar in Asia and Europe (the respective central banks) want to block the dollar’s collapse because that would threaten their exports to the US, and because it would devalue the dollar assets they hold. The global economy has developed with and through the dollar as the dominant currency, and there is no ecidence to date that the only other remotely serious candidate, the Euro, is about to replace the dollar in this respect. This is primarily not an economic issue but an imperial one – and neither Europe nor Japan has shown either the will or the capacity to displace the US from its leading role in the capitalist world. In contrast to the old paradigm of inter-imperial rivalry, the nature of current integration into the American empire means that a crisis of the dollar is not an ‘American’ crisis that might be ‘good’ for Europe or Asia, but a crisis of the system as a whole, involving severe dangers for all. To suggest that because the holders of American Treasury bills are now primarily in Asia we are therefore witnessing a shift in the regional balance of power, is to confuse the distribution of assets with the distribution of power (Arrighi 2001). [pp. 40-42]